Wednesday, December 31, 2014

For over two decades, the Ministry of Civil Aviation has presided over the demise of many an airlines in the country. As one more airline prepares to breath its last, a series
of measures are being “considered” in an effort to “do something”. Among the
proposals being considered is a ridiculous proposal to cap airfares. “…to prevent airlines from both
over-charging passengers in spot fares while at the same time ensuring that
airlines do not offer very cheap fares below the cost of operation….the
ministry sources had recently indicated that there could be a cap of about Rs.
15,000 on maximum fare on any sector. The ministry sources are exploring the
possibility of linking fares to the distance per km. Civil aviation minister
Ashok Gajapathi Raju is currently examining the proposal which could be cleared
by the ministry very soon…”.

In fact, every time airfares go up, the myth of airlines ‘fleecing’ air passengers rears its head. What is shocking is that even the
DGCA subscribes to this view. Its high time this myth about fleecing air passengers is busted.

Can the Ministry of Civil Aviation explain why - since 1991 – aviation has done so badly while every other industry in the country has prospered ?

Aviation is a difficult business

An aircraft is a complex machine.
An average commercial aircraft takes 6 months to build and costs a million
dollars. A popular airplane such as a Boeing 737 is made up of
6,00,000 parts while the bigger ones like Boeing 777 may have them in millions. Malfunctioning of a single part can prove fatal, as the plane
flies in inhospitable conditions 30,000 feet above the earth’s surface. Modern
day planes carry ‘autopilot’ modes that use computer software to control &
guide the aircraft, eliminating human errors. Aviation consumes billions of dollars in R
& D expenditure, and has over the years made our flying experience safer, faster and better.

Notwithstanding some recent incidents, air travel is remarkably safe and punctual. Most flights
take off and land on time, and accident rates are near zero. Boeing reports that in more than half a century of commercial flights (1959-2013), there have
been less than two thousand accidents across the globe, of which only one third
had fatalities. Compare this with accident statistics on road, where more than
1.1 million people have died in road accidents in India in just the last ten
years (2003-2012) alone.

For all this, and the sheer speed
of travel, the passengers have to pay.

The economics of aviation
business

Running an airline is highly
capital intensive. Aircrafts are expensive, specialized technical staff such as
engineers and pilots don’t come cheap either. An inventory of spare parts needs
to be kept at all times. Maintenance facilities are few and expensive. India’s
aircrafts reportedly fly to places like Singapore and Abu Dhabi for
maintenance. More than 50% of the operating costs of an airline are fuel costs
alone. All these costs are recovered mainly from sale of tickets and booking of
cargo. But in India the business is taxed heavily under the faulty notions of
“taxing the rich”. A large chunk of the ticket price you pay never reaches the
company and is pre-empted by the government.

Once a flight has been
“scheduled”, all the costs are almost fixed. Whether the flight takes off with
ten passengers or a hundred, it costs the same to the airline. In other words, the
incremental cost of flying an ‘additional’ passenger is almost zero. This lends
the airline industry neatly to a dynamic pricing model, where empty seats in a
flight can be sold off cheap – every additional rupee directly adds to the
recovery of the fixed costs. If and only after all the fixed costs are
recovered can the airline turn in a profit. For any business to be sustainable,
it needs to make a profit.

The myth of 'fleecing' air
travelers

In the short run, supply of seats
is largely fixed, as flight routes and schedules are announced in advance. It
is therefore the demand for seats which drives airfares. When the
demand is high, the airfares rise. Higher airfares help airlines earn revenues
which compensate for low fares when the demand is low. The notion that airlines
“fleece” travelers with high fares is therefore flawed and misleading. The
'fleecing' allegation is impossible to accept when most airlines are making
losses. A 'fleecing' business would typically be a monopoly and make
super-normal profits. If an airline demands fares which are exorbitant,
travelers have an option of using some other airline, other modes of transport,
or even not travelling at all. It is the traveler who decides whether she
values the travel as much as the price of the ticket, and takes a decision.
Also, high fares apply to a small number of seats that are sold closer to the
date of flight, passengers who plan their travels well in advance can usually
buy 'reasonably' priced tickets even in peak season. However, the media
sensationalizes a few isolated instances of high spot fares and misleads the public.

If there is any fleecing that
occurs, it is due to the high taxes that are imposed on every aspect of the business. A huge chunk of
the ticket price that the buyer pays doesn’t go to the airline. If high
airfares in peak season are banned, it will impact the ability of the airlines
to offer low airfares in slack season, and no one will be any wiser.

On the death bed - again

The aviation sector in India was
first opened up in the early 1990s, but most airlines which came up at that
time have failed to survive. A second lot that came up in the early 2000s with
the entry of low-cost pioneer Air Deccan has done no better. The main
contributor to poor mortality of India’s aviation sector is the regulator
itself. The sector has been “…choking on high taxes, poor regulation and bad
airports…”, to quote Capt. Gopinath. The DGCA seems to have taken upon itself the mandate to regulate airfares. The Narendra Modi government has come to power on a platform of 'good governance'. The PM has often espoused the cause of 'minimum government, maximum governance' and claims to have a business friendly image. That such a government can even think of regulating airfares sends a shiver down my spine.

Sunday, December 21, 2014

Journalists & cameramen have assembled in large numbers at the
Delhi’s Indira Gandhi International Airport, eagerly awaiting the arrival of an
incoming Air India flight. The flight arrives, and a triumphant Arun Jaitley,
India’s Finance Minister steps out of the aircraft, flanked by top Finance
Ministry officials. He is carrying two large suitcases in his
hands. For a moment, he puts the suitcases down and waves to the waiting media.
Everyone knows what’s in those bags. The reporters just cannot wait to ask him some
questions. The moment has arrived. Yoga guru Baba Ramdev is
among the first to issue a congratulatory tweet to the NDA government. Prime
Minister Narendra Modi proudly proclaims that his government has completed an
electoral promise made to the nation. The black money stashed abroad by
unscrupulous Indians in Swiss banks has finally been brought back!

If this is your visualization of
the moment when India is going to get back its promised “black money” from Swiss
banks, this write-up is going to disappoint you. But the media coverage of the
black money issue has been so wanting in depth, and so mired in meaningless sensationalism,
that the aam aadmi may be forgiven for
thinking something similar is going to happen one day. The manna from
Switzerland is bound to arrive. After all, wasn’t it part of the “Achche Din” package?

In this article, I put in perspective a few
thoughts on this much debated topic which seem sorely missing from the mainstream discourse.

The color of “Black Money”

I have found most discussion on the black
money issue, such as this or this or this or this center around tax evasion. Businessmen make profits on
which they do not pay tax, the money is secretly moved to some
bank in Switzerland. This money needs to be brought back as the country is losing out on tax revenue. This is the standard narrative of black money that is dished out to the aam aadmi.

However, this is far from the
truth. Tax evasion is only a part of the problem.

Proceeds of crime

A large part of the money stashed
abroad illegally is, what is termed in banking parlance as
“proceeds of crime”. It owes its origin to criminal activities like corruption,
misappropriation of government funds, fraud, cheating, or activities of underworld gangs, drug mafias and terrorists. The entire wealth accumulated though criminal activities is illegal and liable for confiscation. The account
owners are liable for criminal prosecution. Here, the question of tax assessment,
payment of penalties or even amnesty (as suggested by some), does
not crop up at all. Simply speaking, if I steal Rs.100 from you and hide it
under the carpet, the problem is not that I have not paid Rs.30 of tax, the
problem is that I have stolen Rs.100. No government in its right senses can regularize this wealth on payment of tax.

Most discourse on black
money conveniently skips this angle.

Under-invoicing of exports and over-invoicing of imports is a standard mode of laundering money abroad

Where is the money?

A common misconception that people seem to have is that the money is lying in some (Swiss, mostly) bank account. But is it there really? Do you really believe that someone
stashing millions of dollars of stolen money would keep it in a bank
account for years together for everyone to see?

Obviously, the money has already been
used up – to buy villas and yachts and Ferraris, to invest in Hedge Funds or Private
Equity, to buy Soccer Clubs or Formula One teams, to purchase hotels, farmland
or commercial property, to invest in shares or pay back loans! Even the returns generated from these would have been further used in payment of dividend, for business or further investments. It is nearly impossible to “bring back” the money the way most people seem to think about it.

Most of the government’s efforts on this issue has centered on enabling sharing of information with foreign
governments or banks involved. Even if that is accomplished, all that a bank
can share is a statement of account, many of them in benaami names or shell companies. The statement would contain inflows & outflows, but actually getting the money back is a different ball game altogether. In this era of electronic
transfer, when money can be moved from one corner of the world to another in a
matter of seconds, we can never get anything in a foreign bank to confiscate. No
government, following its “due procedure” can ever move faster than the account
holder himself and ‘catch’ the money in a foreign bank before it moves out.

Black money once “created”,
is simply impossible to “bring back”, at least in the manner in which it is being made out to be. Its better the people face this reality and temper their expectations, no matter how noble the intentions of the authorities may be.

How big is the problem

There is no doubt that the extent of the problem is humungous and needs to be tackled on a war footing. For example, illicit capital flowing out of India over a 10-year period from 2003 to 2012 has been estimated to be higher than the country's total income tax collection during the period itself. While everyone agrees that the
menace needs to be curbed, solutions are difficult to come by. Combating the problem requires negotiating a complex maze
of financial regulations and international diplomacy. Though Switzerland
has received the most media attention, it is not the only “tax haven” where such funds are being siphoned off, there are several others. (For example, Tax Justice Network lists out 73 such jurisdictions).

In 2007, evidence of deposits of
more than US $ 8 billion surfaced in the UBS Zurich accounts of Hassan Ali
Khan alone. The inaction of the Manmohan “Sin” Government in cases such as these
led to the landmark Supreme Court order in July 2011 forming a Special
Investigation Team (SIT) to investigate and bring back black money. The SIT was formed immediately after Narendra Modi government took charge in May
2014.

The landmark Supreme Court order forming the SIT came in a case filed by Ram Jethmalani & Others

The SIT on black money

The Terms of Reference of the SIT (available here) are wide and far-reaching. The SIT is charged with the responsibility and duty to investigate and prosecute all instances of stashing of unaccounted money in foreign bank accounts, investigate and prosecute activities which are the source of such money and to prepare an action plan for the future. The SIT is headed by former Supreme Court judges and has heads of virtually all national investigating agencies such as IB, RAW, CBI, ED, DRI, NCB, FIU etc as its members. It reports directly to the Supreme Court. All organs of the Central and all State governments, such as agencies, departments, constitutional bodies etc have been ordered to co-operate with the SIT. The SIT is also empowered to re-open past cases where investigations have been completed and charge-sheets filed.

Effectively, the issue of black money stashed abroad is now outside executive control and owned by the SIT. It is the SIT that has to deliver concrete results, not just in terms of giving recommendations for the future (which is the easy part) to pre-empt generation & stashing away of money, but actually getting back what has been lost and prosecuting those involved. The SIT report is awaited. But it is pertinent to note that even the ToR of the SIT or the Supreme Court order which led to its formation (available here) does not specifically charge it with "bringing back" the siphoned off money.

What can be done

Clearly, the fight against black
money needs dramatic solutions and out-of-the-box thinking. Suggestions such as banking
transaction taxes, annulment of high value notes, stringent regulations and
even amnesty schemes have been suggested from time to time. While each of them
have their own merits and demerits, the one I have found the most actionable
has come from “super spy” Ajit Doval, presently the India's National Security
Advisor. In a blog post in 2011, Doval writes:

"...India
must pass a penal law declaring itself as the sole owner and beneficiary of all
Indian monies, assets and bank accounts held abroad by or the dependents of
Indian nationals without due declarations to the Indian authorities. On the
strength of such a law, the Government of India can ask world governments
and foreign banks to recognize Indian government as the beneficiary of undeclared wealth and freeze the accounts till owners of the wealth are able to
prove that they had acquired it by fair means and from legally valid sources....

...Government
of India should register an omnibus criminal case against suspected unidentified
persons who have been indulging in criminal activities and unauthorizedly
transferring money to tax havens abroad.
This would enable the Government to get assistance of foreign police and
investigating agencies for gathering evidence and information. It will empower
the government to approach different banks abroad, as also the concerned
governments, for information regarding the money trail as they pertain to
criminal cases..."

In other words, we should "nationalize" all such assets lying outside India and put the onus on their owners to prove that the assets are legitimate.

When it comes to recovering what has already been plundered, only such drastic solutions can give some decent results. Even then, we can only hope to recover only a part of the stolen wealth, nothing more can be expected.

The economic solution

Enforcement and policing is never a sound and harmonious solution. For that, the problem has to be pre-empted.

Tax rates have to be kept as low
as possible, so that tax avoidance ceases to be profitable. This means the government keeps its expenses as low. The government should withdraw from economic
activities, restricting itself to the bare minimum such as maintenance of law & order and running the judicial system. This reduces the scope for bribery and crony
capitalism. In India, much illicit wealth has been generated from bribes paid to twist policies or government decisions. Scope for discretionary decision making aids corruption.

Global economies are slowing, and
profitable investment opportunities are shrinking abroad. India is among the
fastest growing economies in the world today. If business climate in India is
improved, incentive to retain money abroad reduces. This again calls for dismantling bureaucratic controls, improving the rule of law and
installing a quick and efficient grievance redressal system.

Despite all this, a few black sheep will still exist. For them heavy penalty should await. Investigations should be fast, and justice delivery certain. Police and judicial reforms therefore should be on top of the government's agenda.

If all this is done, the problem
of “black money stashed abroad” can be mitigated. But for now, the suitcases Mr. Jaitley would be carrying are likely to be largely empty.